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Surviving Algo Hell

Gold bar and coins

So I guess this is how it works now. The dollar index rallies back to reclaim 50% of its losses from Friday, and this prompts enough HFT algo selling that we lose 100% of Friday's gains in the COMEX metals.

As you know, I've been doing this for nearly ten years now. Over that time, I've seen all sorts of temporary HFT algo correlations that have driven me mad. There was the USDJPY link in 2014-2015. Then there was the yuan link in 2018. But all the while, changes to actual fundamentals drove precious metals prices higher regardless.

And these are unprecedented times. We have pandemic-related economic stress, massive fiscal deficits, direct central bank debt monetization, surging global physical demand...all FUNDAMENTAL items that should be driving price higher. But FUNDAMENTALS DO NOT MATTER to the pre-programmed computers that buy and sell the phony-baloney digital metal derivatives offered on the COMEX. All that matters in this current time is the dollar index. See the charts below from the morning of October 13.

USD Index Future

Gold Future

And again, it hasn't always been this way. Regardless of what The Generalists claim, the gold price is not simply "the inverse of the dollar". That oversimplistic opinion denies the specific fundamental realities that drive the price of nearly everything. See again those listed above for gold and silver:

  • Covid-related economic stress
  • massive fiscal deficits
  • direct central banks debt monetization
  • surging global physical demand

But this HFT algo takeover began in mid-August, and it has continued to this day. Below is a chart of COMEX gold in candles and the "UDN" ETF as a blue line. The UDN is an inverse U.S. dollar index ETF. This means that as the dollar falls, it goes up. So if gold and the dollar were perfectly inversely correlated as some suggest, you'd expect very little variance between the two and a consistent correlation. Do you see that below? I don't. In fact there's often the opposite, and when the entire five years are taken as a whole, note that the dollar is nearly flat while gold is up about 70%.

But now look at the action just this year. The correlation has obviously grown tighter since March. Remember, the blue line goes UP and the dollar index falls, and vice versa.

And now look at the link since the middle of August, when we were quick to notice the sudden 1:1 correlation. At present, nothing else matters to the gold price. Not only that, COMEX gold is actually performing worse! Which you've seen again since Friday, where the dollar index is still down from Thursday, but now COMEX gold is down from there, too.

So now here comes the tricky part. You must ask yourself WHY the sudden 1:1 correlation.

  • Is it due to a total absence of human traders in COMEX futures? Notice the correlation really began to pair up in late March. Well, what happened in late March? The COMEX nearly seized up when the EFP scam finally exploded in the Bank trader faces.
    The CME Opens Pandora's Box - Craig Hemke (31/03/2020)
  • Are large institutions and hedge funds simply avoiding major positions at present and taking a wait-and-see attitude toward the U.S. election and other pending events...leaving the computers in charge of the playground? Maybe, but total COMEX gold open interest remains relatively low and at nearly the same levels seen during the rush in price back in August.
  • And what organizations have the financial ability and desire to create these algorithms in the first place? It's not the Spec funds. And besides, they're mostly long as a speculative trade with no need to currency-hedge their bets. Instead, it would seem that only The Banks have the wherewithal and motive to clamp down and manage price in this manner.

Either way, the linked price action is UNDENIABLE at this time and we are left to wonder WHEN the link will finally break...just as the USDJPY and yuan links were finally broken in the past. Maybe after the election? Maybe after the FOMC formally announces Yield Curve Control? Maybe once real rates make new lows below -1.1%? I don't know, and it's impossible to say.

But what I do know is that COMEX gold in 2020 is tracing out a pattern similar to 2019. Recall that price peaked near $1560 in late August 2019. It then consolidated its gains by trading sideways for about 90 days before rallying back to $1520 by the end of the year. Similarly, COMEX gold peaked this year in early August, and it is currently consolidating its gains. Once the U.S. election is behind us, we are very likely to see price rally back to near the earlier highs before the end of the year.

So use this time wisely. Understand that these Bank-driven algo correlations are always temporary as, in the end, the fundamentals overwhelm them. Keep adding to your stack in preparation for much higher prices again in 2021.

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About the Author

Our Ask The Expert interviewer Craig Hemke began his career in financial services in 1990 but retired in 2008 to focus on family and entrepreneurial opportunities.

Since 2010, he has been the editor and publisher of the TF Metals Report found at TFMetalsReport.com, an online community for precious metal investors.

*The author is not affiliated with, endorsed or sponsored by Sprott Money Ltd. The views and opinions expressed in this material are those of the author or guest speaker, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.


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